Welcome to the Erste Group Bank AG. Today's conference is being recorded. Now I'd like to turn the conference over to Mr. Thomas Samarara. Please go ahead.
Thank you, operator, and a very warm welcome to everybody who is listening in to our Q2 twenty twenty conference call. We follow our usual procedure, which is that Jan Spalt, CEO of Erste Group Stefan Dwerfler, CFO of Erste Group and Alexander Harvater Rabeck, Chief Risk Officer of Erste Group, will host this call. They will lead you through a couple of slides that we have prepared for the quarter, after which time they are ready to take your questions. Before handing over to Bernd Spalte, let me highlight the disclaimer on Page two. And with this, Bernd, please take it away.
Thank you very much, Thomas. Good morning, ladies and gentlemen. Welcome to our Q2 earnings call. Let me guide you to Page number four of the presentation, which reflects the COVID evolution situation in our countries. We have been mentioning last time that all of our governments have employed a strategy and a policy of early shutdown, very rigid shutdown, just critical infrastructure to remain open with the hope and the attempt that containment would be managed and an early opening of the economy would be achieved.
Now this clearly has been implemented and target whether or not it was efficient, it was effectively achieved. So what you see on this page is that in all of our countries, infection rates and health development have responded very positively to these policy interventions. And I do think that we all are now in the same situation that after a very early opening up of the economy again, the risk of infections flaring up again and the risk of people getting sick again and need to be tested again rises. So it takes no profit to understand that this fall will be an interesting and difficult fall, and we all need to prepare ourselves. And we are really proud that from a medical point of view, we do take this very seriously.
We protect our employees, and that we are making sure that we get to very fast test results so that we can prohibit and avoid chain building and the cluster building going forward. So what you see here on this page number four is that, yes, the policy response has been effective in all of our countries. And, yes, we need to still manage it because the crisis is not over. And the health situation in terms of having not yet found a vaccine is also not yet sold. So we need to live with that for a while.
And what I'm telling you is that we will be able to live with that for a while because you can manage that. When we get to Page five of the presentation, this is something which you are very much aware of, and I will not spend much time. The macroeconomic situation, how we entered the crisis was very, very strong. Of course, in the meantime, there have been increases in unemployment rates. There have been a lot of impacts already on different industries.
And I'm sure we will debate that later what happens to the tourism industry, what happens to the event management industry, what is happening to the travel industry, and what is happening to the car industry and the likes. But overall, this region is strong, and this region will rebound quicker than any kind of other region. And I think that is also reflecting the banking markets in our region as well. These banking markets are sort of in the position of excess liquidity. Their capital is strong, and they are in a position where they can sustain any kind of adverse economic developments in the short to medium term.
Now going through a little bit of the future in terms of how do we expect the recovery to take shape. We have last time said that on the assumption that early shutdown, early opening up, we expect a V shaped style of recovery. We have slightly amended that as we have learned more. We do think that as there is no clear indication of any kind of medical control very short term, we will see a wave like shaped recovery. Yes.
After a very weak 02/2020, 2021 and going forward, we'll look a lot better. But, also, there will be local and partial infection rates flaring up, which will lead to slowdowns, which are isolated. And I also think it's fair to say that we all believe that there will be no general shutdown comparable to what we've seen in the spring. Everybody will try to avoid this, and everybody will try to sort of localize cluster billing very early on. So what we say is it will be a very remarkable recovery over the next year, but it will not be one line up.
So what you see on the upper left right hand chart is a kind of visualization, which we are actually quite proud of. Even though it doesn't show any kind of specific timeline, It shows the shape, and this is how we believe it's going to take place. Now economically, 2020, as you have seen the most the latest revisions, 2020 is not going to look pretty in any of the regions. But 2021 will show a recovery. And if you look, and I think that's particularly interesting to the lower right hand chart on the short time work schemes development, and I think Austria is the most important and relevant here because short time work was the most important in Austria compared to any kind of other region.
I think this went down from a high in May year very significantly. So we see already a slight recovery. But mind you, it's all not yet over. We will go through difficult times still. Now let me turn to Page seven, business update, what is really happening on the ground.
And I think we should not overemphasize Corona and what is happening around Corona and the state measures. We also should debate what is really happening, what are the customers doing, what is happening on the business side, core business side, really. In terms of retail, Page number seven, we do see diverging trends. And intuitively, I would have thought that the demand for mortgage loans would fall more sharply compared to consumer loans. This is not what is taking place.
What is taking place is that we still see a very robust demand for mortgage loans and that we see consumer loans falling significantly, both from a demand as well as when it comes from a supply side. Clearly, we have tightened our underwriting standards, reflecting and respecting the situation which we're in. But also consumers are stepping back from adapting themselves for the purchase of a TV set or whatever. So I think on the consumer loan side, we see a significant fall in volumes, while mortgage loans or housing loans are still holding up well. Asset management and also bank insurance products have seen a little bit of a setback but are on their way, both of them, to recovery.
And I do believe that this is, again, a question of how confident are people in the recovery of the economic situation as such. Now when it comes to how did clients change their behavior in this crisis and through this crisis, We had some very early observations already shared last time in the earnings call that people very quickly and very pragmatically changed to digital behavior, no matter what kind of age, no matter what kind of any kind of sort of segment they're in. And now ever since the world has opened up again, coffee shops are open, restaurants are open, shops are open, there's a lot of flowing back of customer business and customer traffic to branches. And you see that in the bottom chart here on this Page seven, we see that people adopted almost the pre crisis levels, but I don't think that they will forget that digital affinity learned through that crisis. So I think it's still early days to really draw very rigid and firm conclusions, but we see developments which we need to monitor forward.
Now on the corporate segment, I think this is a particularly interesting segment, which we sometimes don't talk enough about. I think it's very interesting to see that corporates still have loan demands. Corporates still try to understand the situation. They hoard liquidity. They build up war chests for potential acquisitions.
I think they're pretty much in the same situations as we are, at least the stronger ones. They think that this crisis situation will bring opportunities and they will watch the market and they prepare themselves for M and A transactions. So I think overall, this is, to what I see, a positive picture. Of course, they have been supported by these state programs. Of course, some of them also model wise will suffer significantly.
But the stronger ones are really preparing themselves for getting into a more aggressive mode. So overall, this is good. If we look at the other side of the coin, of course, competition is increasing again. So margins are under pressure, not underwriting standards. Nobody is doing stupid things these days.
But margins clearly, in a situation like this, are not sort of very much supported. And lastly, there are industries which are relevant to a region, specifically the automotive industry, which we need to watch. I'm sure that through our discussions, debate and Q and As, we will get into that automotive industries where we have a very significant dependence of some of our countries, is developing so far reasonably well, and it's important to shape a view on how this will develop going forward. And with this, I will turn over to our group CFO, Stefan Graflov.
Thank you very much, Bernd. I would like to update you on the latest operating trends, And we'll start with loan volume and moratoria take up. On the net loan growth, we have seen an increase on quarter to quarter basis of 1.6%. However, this number really needs to be analyzed in much more detail to understand the underlying trends. What we all have been very keen on learning in the last weeks, months and in the meanwhile quarters was how the take up of the respective state schemes and support schemes would happen.
And what we see is that there is relatively limited use of state guaranteed loans as such as the banks and particularly also Erste Group is offering various other elements of support, and of course, the moratoria have been playing into that. That's why on the upper right hand side, you see a structure of a good or best guesstimate and best analysis on how the loan growth of overall 1.6 has been split into guarantees, moratoria and business. All of that results in our assumption that underlying net loan growth of this year is going to be around flattish level, something that might of course depend on further development of what Bernd Spait has been explaining about the macro environment and the situation around the coronavirus. What has been interesting observation is the fact that in particular moratoria and payment deferrals, but also the state guaranteed loans so far have been primarily booked in Austria when it comes to a volume view. On the lower right hand corner, you see all volumes, which are somehow subject to key COVID-nineteen measures.
And those are numbers which are actually then summing up to what you see in the upper right hand corner. What is maybe most important for all of us to understand and where we really were in a very, I would say, foggy environment at the very beginning of this whole experience was what will the moratoria take up be like? And most of you will remember that we actually started our assumptions for the opt in countries, so all countries other than Hungary and Serbia, with assumptions to end up around 20%, maybe north of that. We then readjusted that assumption downwards to 15 to 20% and later on to 10% to 15%. And as you can see from the analysis here, into retail and corporate, even this in average will be ending up as we expect currently at the lower end.
And what I find particularly interesting is the fact that in the opt out countries, and here I want to have a want to ask you to have a look at Hungary in particular, even our already quite optimistic assumption that 50% of our clients will go on paying into their loan into their loans was not optimistic enough. Of course, and this will certainly be also a point of discussion for our Q and A, all of that will depend further on whether certain moratoria might be extended and how long certain schemes will be around. With that, I ask you to have a look at Page 10. And there, I want to briefly discuss all the components of our operating result. Most importantly and most also interesting for all of us in the recent months and with all the rate cuts happening around NII development.
As expected, we saw a significant impact in particular from the rate cuts in Czech Republic. You're all aware of the change in direction of the Czech National Bank cutting from 2.25 to 0.25. And all our expectations with regards to impact on our P and L were materializing. We were able to mitigate that partially, but of course, this is a clear negative on our net interest income. We have been participating in the TLTRO III in the amount of roughly €10,000,000,000 This will help on the NII side, but clearly can only partly mitigate the before mentioned negatives.
At this point in time, we are expecting a slight decline in NII versus 2019, but I want to highlight that the volatility around plusminus €50,000,000 can alone come from FX movements as we all experienced in the last few months. Therefore, it's the clear goal of the management to achieve a better NII result, but we are currently expecting slightly lower NII compared to the 2019 full year. On the fee side, we saw of course during the lockdown less activity and a clear drop in fee income from new business. However, if you look at the numbers, we are confirming based on those our expectation of a mid single digit drop 2020 to 2019. And also our expectations through to the CEPA impact is exactly matching.
Year to date, we have an €11,000,000 impact negatively. This has nothing to do with COVID obviously, and this is exactly what we always communicated in that respect. Obviously, our business colleagues are doing everything to make up for some of the drop back during the lockdowns. We expect the business activity to be pretty good in Q3 compared year on year. However, it's completely clear that we will not reach the €2,000,000,000 number of 2019.
Trading at fair value, we are back in positive territory year to date. So the full recovery from the Q1 twenty twenty lows happened. We all know what was going on in the capital markets. That helped a lot. And this was something we already mentioned in the April call, so nothing really surprising there.
We are absolutely confident that at least in a reasonably constructive capital market environment, we will have usual quarters Q3 and Q4 and will end up in significant positive territory in trading and fair value overall. Last but not at all least, operating costs. We are now absolutely confident that the costs are going to be lower 2020 full year than they were in the 2019. Let's not forget, we were starting off the year, of course, before COVID with expectations of significant wage inflation throughout CE, but also in Austria. Some of that wage inflation still happened because the negotiations took place before the whole COVID crisis was hitting.
So we're seeing some increases on the wage side, however, significantly lower than we were originally expecting. Therefore, Parex, if you look at those in particular, are currently flat year on year, and we are working very hard to bring those down in particular. In the other areas, depreciation and amortization is flat and other expenses partially due to the crisis environment, but also partially due measures of management was coming down. So to sum it up, costs 2020 will be lower than 2019. And with that, I hand over to Alexander to give you an update on the risk situation.
Thank you, Stefan, and good morning, ladies and gentlemen. Risk costs, which is not surprising, are a dominant factor in Q2. As planned and already announced, we performed the update of the FLI, which is the result of the biggest driver of our Q2 risk cost bookings. Overall, we booked risk provisions in the second quarter in the amount of €613,700,000 equaling 148 basis points annualized. This amount consists of roughly $220,000,000 provisions out of ordinary course of business, quite evenly distributed between retail and corporates and mainly caused by rating migrations.
So no significant individual defaults yet. The biggest chunk, as mentioned, comes from the FLI update, which resulted in a charge of €300,000,000 The underlying scenarios, which are based on the expectations of our research colleagues, envisage a strong GDP drop in 2020 in our EU core markets ranging between minus 4.6% to minus 9% for the individual countries. This strong drop is followed by a rebound of average 5% GDP growth in 2021 and around 3% growth in 2022. Another CHF 90,000,000 risk cost charge is the result of stage overlays, which we, as we already did also in Q1, performed for the most COVID affected industries like transportation, hotels, leisure and also some cyclicals in order to timely capture those portfolios with higher risks of defaults expected at a later stage. Together with the stage overlays we performed in Q1, this amounts to 151,000,000.
With these updates, our share of Stage two loans has roughly doubled to approximately now 16% with a quite comfortable coverage ratio of 3.8. For the full year, we further sharpen our guidance on risk costs, which we currently see 65 to 80 basis points for the full year. Now to NPL on Page 12. Our NPL ratio still stands at very low and even lower than in previous quarter, 2.4, with a very strong coverage of above 90%. When you compare this to our pre crisis levels of 02/2008, which you can see on this slide on the left hand side, the very strong starting position in terms of asset quality is clearly visible.
NPL ratio expectation for the full year is a slight increase with remaining strong coverage. On the next slide, Slide 13, you can see again on the right hand side the industries, which in the context of the COVID crisis are of special focus. Let me pick a few. Oil and gas is still no point of concern for us. More than 50% of the exposure is concentrated on very large companies in our region with very strong downstream operations.
Automotive, as you know, a major part or a very important industry in our CE region. Also here, no change to the Q1 situation. Our exposure is concentrated in OEMs and in OESs with very strong financials. All manufacturing plants in our region are operating and expected to ramp up shifts on the short term. Now tourism, hotels and leisure.
Summer season started pretty well in Austria and Croatia, in some parts even surprisingly good with strong bookings until September. However, now given the recent increases in infection rates where the impact on the next weeks with potentially new travel restrictions, it's very hard to predict how the overall season will develop. What we expect is strong government support for this industry of high importance, especially in Austria and Croatia. On the next slide, Slide 14, some more details on commercial real estate. For very obvious reason, commercial real estate retail, which accounts for approximately 10% of our overall real estate portfolio, was and is under our particular monitoring.
What is good news is that financials and structures are sound throughout our portfolio, and customer traffic is also largely back. Of course, a lot will depend on consumer confidence and readiness to spend in the future, as already my colleagues have mentioned before. For residential, which is the biggest portion in our portfolio, we are confident to even optimistic. And also regarding house prices, we currently would rather see stable price developments than decreases in value. Demand for mortgage loans, as Bernd also mentioned before, also came back strong after end of the lockdown.
A short snapshot on consumer loans. As you know, consumer loans are not a major part of our retail portfolio. The major part is secured mortgage loan business. On the development of the new business bank, we commented on one word from the risk perspective. Of course, it's clear that due to the Moratoria, the deteriorations in the portfolio will be visible only later.
But what we see already now, some trends is giving confidence, most importantly, the participation rate in Moratoria, which also has been mentioned before by Stefan Boffler. And in the countries with opt in, also for consumer loans, the opt in ratio is not huge. So given the current data and the feedback from our clients and with many of our clients, we are in very close contact, We expect only moderate deterioration of the portfolio quality, which will we are confident we will be able to handle with our strengthened collection capacities and also, which is extremely important, timely communication with the clients before moratoria end. Before I hand back to Stefan De Offler, allow me two quick sentences on credit risk RWA development. Credit risk RWA went down significantly by more than €5,000,000,000 mainly driven by the measures of the CRR quick fix.
An additional relief came from the implementation of the SL model in Austria and Slovakia. These reliefs were only partially set off by some rating migration effects for corporates and sovereigns, roughly 800 and also loan growth, 500,000,000 for corporates and 400,000,000.0 on corporates, sorry, and €500,000,000 on retail. And with this, back to Stefan Draplin.
Thank you very much, Alexandra. Actually, a perfect last point from your side because this plays very much into capital. And with that, I ask you to have a look at Page 15. We decided to share with you capital development year to date in the form of this waterfall represented on Page 15, which hopefully will be helpful to understand the many components playing into our common equity Tier one position. Let's start with the big picture.
The development year to date starting from roughly 13.7% common equity Tier one ratio, The main development was the 55 basis points up drift out of the RWA relief from the SME supporting factor. Out of our all other activities, all the other elements that you see here with regards to inclusion of half year on profit, regarding OCI developments, which we prominently discussed in Q1, minorities inclusion, all the other components that you can analyze not only on this page, but also on Page 49 are basically ending up in a plusminus zero development, which I personally think is also quite a positive news. However, the uplift from 13.7% to 14.2% on a net basis comes from the SME supporting sector. Having said this, I also want to draw your attention to the element of half year 01/2020 profit and half year 01/2020 dividend accrual because this requires a brief explanation. The accrual of the 2020 dividend is based on a 45% payout ratio.
How does this come? That has been a result of our detailed discussion with the GSD, how we need to accrue for dividends if we say we are willing to pay a dividend, but we do not want to and we cannot specify the exact amount that we are planning to pay out for 2020. And the answer was and the result of those discussions was that you have to build an average of the last three years, and this average you need to apply to accrue for your dividend for the first half year. And this exactly results in the €137,000,000 that we have been adding to our, so to say, reservation on the capital side. So this adds to the €1.4 per share that you are already aware of and we have been accruing for the year 2019, however, not having been paying out this.
So, that adds up to a total of €782,000,000 or $6.68 basis points that you see in the one the line above the lowest accrued, but unpaid dividends for full year 2019 and half year 01/2020 is of an aggregated amount of €782,000,000 or 68 basis points. Maybe one brief remark adding to what Alexander Havel already said about RWAs. The absolute total of the RWAs was €118,600,000,000 by the end of the year 2019. It would have gone up to around about €123,000,000,000 with ordinary course of business and other elements of model application and so on and so forth. And due to the reducing factor from SME supporting factor, it went down to now €115,300,000,000 on total risk weighted assets.
I think that's a good basis for talking about the outlook. And with that, I hand back to Jens Berger.
Thanks very much, Stefan. On the conclusion, I think this is rapidly drawn. Clearly, 2020 outlook will be dominated by this steep economic fall throughout the region, which will be different from country to country, but still clearly negative. We will also see effects from all of these fiscal packages We already have reached the economy. So I think that's also something which will help us mitigate all of these effects.
We on the business performance, we still see a lot of underlying business development in terms of demand, both on the corporate as well as on retail side, where I do expect that on the more longer term investment horizon, we still will see some reluctance as long as the situation still clouded. But overall, we see a solid underlying business development in all of our markets. Credit risk, Alexandra has said everything which is to be said. We don't see anything like delinquencies increasing right now. But what we have built this half year is reflecting what our anticipation for the end of this year and for early next year would be looking like.
And I do expect that it will be very much going into more difficult times for the whole economy, which we are now very well prepared for. On the capital position, I think the one thing which we will debate in our Q and A session will be dividend. The situation, based on what Stefan has said, is very, very clear. We have had very strong results in 2019. We have built up an incredible credit capital position now.
So I do think, generally, it's very clear that we stick to our statement of before that we're firmly intended and committed to pay dividends and to reward our shareholders, both when it comes to the earnings for 2019 and also when it comes to the business development 2020. At the same time, I want to make a very clear statement that, no, we will not go against a valid ECB recommendation. This is not what we think would be wise. So we will respect as long as this recommendation is up and valid, we will respect that. So we do hope, and this would have been our anticipation already for Q4 this year, the visibility will be a lot better beginning of next year and that then based on a better economic visibility, based on a very strong capital position and an underlying earnings capacity power of Erste, we will be able to propose a dividend payment to our shareholders in the AGM.
So I think that's pretty much it. And with that, I would like to conclude the presentation. Looking forward to a lively Q and A.
Thank please signal by pressing star one on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, to ask a question, please signal by pressing We will take our first question now from Anna Marshall from Goldman Sachs. Go ahead.
Good morning. Thank you for the presentation. Two questions from me, please. First one, a clarification on capital and dividends, very effectively. Could you please clarify what assumptions in your CET1 ratio guidance that it is expected to remain strong?
What assumption was made regarding the 2019 dividend accrual going forward following the ECB's updated guidance on dividends that you mentioned? And at which point would you make the final decision on the 2019 dividend accrual? My second question is on asset quality. Do you have any initial guidance on '21 outlook following the front loading into 2020? And, also, in terms of your lending at the moratoria, you said that that you're in touch with your customers.
Do you have any assessment on what proportion of those loans that are currently under moratoria are likely to turn into NPLs? So
maybe once again, and thanks for the question, clarifying what we are talking about when we say €782,000,000 are, so to say, set aside for dividends. The €1.5 per share, which is exactly translating to €644,000,000 is the still and the unchanged, so to say, the unchanged position in our regulatory capital for the year end profit 2019, and has never been changing since then. This does not mean any kind of pre decision for what the actual final proposal will be for a distribution since we took back this €1.5 decision in the March already. So it doesn't indicate anything about what we can and will be able to pay at the end of the ECB and we won't call it ban, we will call it precisely and correctly recommendation, but I think Bjorn Spatz has been clear enough about how we interpret that. And to all my knowledge, all supervised banks in Europe are interpreting this recommendation of ECB the same.
So it's EUR 1.5 ever since this has been going to the distributable, but not paid out earnings from 2019 on the one hand. And then as I tried to explain and hopefully since you didn't ask for that, Anna, I was clear enough on that. What has been adding to that from half year 01/2020 accrual, this €137,000,000 reflecting 45% of the CRR accepted profit from the ECB side. So I hope this answers the question and clarifies what I have not been precisely asked before.
So then I think
Okay.
Was just curious sorry for interrupting. I I was just, curious in terms of the path of the CET1 ratio from here onward, kind of on a quarterly basis, whether that's passed and the assumption that the return ratio remains at a strong level, whether that's a pass, basically, assumes that at some point, you will release this 2019 dividend accrual or it is not reliant on that?
Yeah. Thanks for that. I mean, look, first of all, I really want to remind everyone how volatile not only the future can be, but how volatile the last two quarters were, also with regards to parameters influencing significantly capital positions of banks. We were showing, at least on the headline, I think it wasn't that bad, but on the headline a little bit disappointing 13.1 common equity tier one number by Q1. Yeah, we all know it didn't accrue for the profit and also on.
But one significant element was, for example, FX volatility and factors stemming from valuation of fair value instruments in a very, very depressed capital markets. No one can guarantee us that this might not happen in Q3, Q4 or Q1 twenty twenty one again. So I think we all should be aware of the fact that this crisis for sure is far from being over. And I think a certain volatility of 0.5, maybe a little bit more even in a capital position is nothing that should be surprising to investors and of course also management. So I think it's important to understand that we need a little bit more buffer in that environment for sure than maybe in a more calm and more constructive economic environment.
Secondly, I tried to explain very clearly that the up drifting capital, and while we are we appreciating this move of the regulator, but the net up drift in the first half of the year came from a regulatory relief. Yes, that's fine, that's good, it supports our business. This is definitely something which confirms our position with regards to overall capital management, capital distribution and so on as Bernsfalck clarified in his outlook. However, we should not be, I would say, overconfident saying that we are building up in this crisis environment percentages and percentages of capital that easily. So I think it's a good advice for all of us to say, okay, we are sticking to our management target of above 13.5%.
We are reasonably confident with that basis on half year one to be above 13.5 also by year end. But there are clearly scenarios which might endanger that. That's all I can say and all that of course also influences at the end of the day, our ability and willingness to allocate a few cents more or less to a final distribution proposal. Alexandra, I think the other question Thank you. You.
Now, Anna, let me try to give you more insight into your question on development of asset quality. Let me start with one very important point, which one cannot stress often enough, and that's why I'm also repeating it. We are entering we have been entering this crisis with a completely different starting position in terms of asset quality, and this is a really huge difference compared to previous crisis in 02/2008. So the most important economic stress factors determining future defaults of households let me start with households, and then I will also briefly comment on corporates an increase in unemployment and a decrease in salaries. So both developments are currently extremely hard to predict.
Of course, the moratoria gives a temporary safety net to most clients and also time to adopt. To what extent this will be ultimately successful remains to be seen for all of us. But given this caveat, let me share some experiences that we had. As I've mentioned, extremely important is to have very close contact to the clients. And this is what we are doing.
And we are having some pre collection activities and really direct calls to the clients. And what we see is that many of the clients that are in the moratorium and the opt in ratio you have seen on Slide nine, which is very positively low, a lot of these clients do not yet face financial difficulties. So it's for many of the clients also a means to increase savings and also to have a sort of reserve. And there are also some, let's call it, and I don't mean it negatively, some free riders who just take this opportunity of not repaying. This amount is quite big.
So judging how many of the clients after the moratoria will face financial difficulties needs to be seen in this perspective. And what we are also preparing is that we prepare repayment plans and potential restructurings for the clients before the moratoria end. So we are preparing our processes, the communication in order to avoid this cliff effect, so the big surprise. Also, the stage overlays that we did in Q1 and Q2 is also preparing for avoidance of this cliff effect also on the corporate side. So as I said, we expect a slight increase in the NPL ratio until year end, let's say, to 3%, not huge.
And with this, you can do some scenario and sensitivity analysis, what you would assume people would go into default. But what we see let me repeat this, what we see and what we hear from the clients, also what we see from the data on salary decreases, it makes us confident that only a minor part of the currently in the moratoria being clients will at the end really face serious difficulties.
Thank you very much.
Thank you. We will now go to our next question from Johannes Thormann from HSBC. Please go ahead.
Good morning, everybody. Johannes Thormann, HSBC. Three questions, if I may. First of all, on Page seven, on the monthly mortgage sales, which was really surprisingly strong in the first half of this year, what do you attribute to this? If customers don't want to debit themselves, they should be probably also more careful on long term debt.
So this is just my first question. And also, where do you see this going in the second half of this year and probably also for total loan volumes in the second half of this year, where do you see the business part going moratoria and guarantee set aside? Secondly, on your cost of risk, you narrowed the guidance to 65 bps to 80 And then you just said that this might be driven by an NPL ratio of 3% going up to 3%. What are the underlying assumptions for this range? Can you provide some more details?
Or what would be needed to drive it up to 100 bps or more? And last but not least, a very simple one on the tax rate. You guide for a rise in 2020. Could you be a bit more specific for run rate, please? Very
good. Thanks, Johannes. I'll take the first one. Allocation is relatively clear. I'll take the first one.
Aleksandra is going to take the second and Stefan is going to elaborate on the tax rate. First one, as I indicated, it was a surprise to ourselves that mortgage loan demand held up well throughout the region even in times when visibility is getting lower. I would not necessarily expect that this is going to be the case throughout the year. So I would expect a flattening of demand and volume development on the mortgage side through the rest of the year. In order for that to pick up again, I think we need to have much more robust visibility on what is going to happen and how this crisis might unfold.
So I do not think that what we have seen over the second quarter will be very predictive of what we will see of the rest of the year. So I would expect a little bit of more reluctance on the demand side to take up longer term commitments.
To the risk costs, so what are the drivers for the current guidance? So drivers are threefold. One is, of course, the macro scenario. The second is rating migrations. So we are constantly reviewing all our industries according to the heat map, and this is also then the basis for the stage overlays that we are performing and that we performed in Q1 and also in Q2.
And the third one is migrations to default. And as it was already indicated so on macro scenario, I have briefly commented, this is based on the expectation of IRFigroup research, which and then you're taking this downside and upside scenario and have this weighted result. And this is broadly in line with the current forecast. This will be reviewed also again in Q3. And in case there should be a major deviation, this will, of course, then have an impact.
Second, the stage overlays, which we are doing really constantly and also constantly adjusting. And then the third one is individual defaults, which we see at a very low level given the moratoria, not only the state moratoria, but also the industry wide moratoria that are offered broadly in our markets. And also given the what we really see, the strong asset quality of our clients. So the clients that we currently see struggling, which is a very limited number, are clients which would have been in some troubles already before, but this number is really very, very low and limited. So portfolio quality plays an important role.
And to answer the question, what must happen in order to drive guidance up is unexpected larger defaults this year.
Thank you. On taxes, we see the run rate long term 21% to 22% based on our analysis. And for this year, of course, with the lower profits that are expected and some elements of Romanian higher tax rate. If you look at the Romanian result playing into it, the major influence of driving it up is deferred tax assets development. So 2021 to 2022, 2023, I would say, to be on the safe side long term run rate, but probably very likely a higher rate for 2020 with given expectations at the moment.
Okay. Thank you.
Thank you. We'll go to our next question now from Gabor Kemeny from Autonomous Research.
Good morning. My first question is on cost. Can you elaborate a bit on the cost outlook? There was an encouraging cost delivery in the second quarter. Costs were down 23%, I think, over the last year.
But I'd like to get a sense of this to what extent was it driven by the lockdown, which I assume could be partly temporary. And to what extent could we see this 2%, 3% annual decline as a run rate for the next few quarters? And then secondly on asset quality, can you elaborate a bit on the increase in Stage two loans? Which countries, which segments drove this quite significant jump in second quarter? And particularly on the retail commercial real estate exposure, which I think it was €4,000,000,000 you show, what's the the share of stage two loans and how much provisions do you have on these assets?
And more broadly, how do you think about these Stage two loans migrating to NPLs going into 2021? Thanks.
So, I'll take the cost question. Firstly, let's not forget where we started from. We started from an expectation of a cost increase year on year of 100,000,000 in the area of 2.5% give or take based on expectations around wage inflation in particular, but also I would call it general uplift. This starting point has been reduced to the level that we expect today, I would say, by three main components. One, as you rightly mentioned in your questions, short term effects.
Yes, the usual assumptions that you would take, lower traveling costs, lower spending on trains all across the group. This is adding up to quite some volume. Also marketing efforts were towards really crisis communication, I think very successfully, if you allow me to remark. However, not so much aggressively, of course, like that into new business generation. And let's not forget that 2019, we had much higher marketing costs based on our 200 year anniversary.
So this is a short term part. The second part is certainly affected by general development around in the economy, which is reducing the pressure on the wage side, which is reducing the pressure on other costs playing into our overall cost results. This I regard as long term or as mid term as the crisis will last. I believe that unemployment rates, you look at levels that we are currently expecting, and I think and you mentioned briefly the current levels, and we expect it to rise into 2021. So I don't think wage inflation pressure will return quickly.
But of course, as we all hope in a midterm recovery, this will come back. So I regard that as supportive for the moment for our cost containment. But midterm, we do not count on that. And honestly speaking for other reasons that you can easily imagine, we also do not hope for that. So the third component is the most important one.
And that is the measures on the management side, our active cost management. And here, I would kindly invite you to have a look not only for this quarter, but also in upcoming quarters to what's going on the Austrian hemisphere. I kindly ask you to exclude savings banks, not because I don't expect them also to take certain measures, but we simply do not steer them directly on the cost side. We see first good successes of what we have been initiating already in the 2019 and what we are very consequently implementing. We are going to keep costs very well under control in Austria and we are going to contribute from the Austrian side to a good cost management.
And I know from my colleagues in various countries across CE that they are taking appropriate measures in order to, I would say, mitigate the drops on the top line by a respective cost measures. So if you ask me, are we going to deliver 2% to 3% run rate in cost reduction over the quarters to come, I would not expose myself to such a promise. However, I can promise you that the next quarters
will
seriously be in connection with cost containment, and we are going to deliver a pretty good cost result 2020 and into 2021. I plan to give you more guidance either after Q3, which I hope that we have better visibility already, but latest definitely with the full year results 2020. I hope this helps on that side. Thank you.
On Staging, you will have in the half year disclosure very, very, very detailed information and all tables available, so all details that you are interested in. However, to commence now beforehand, as you asked on retail commercial real estate Stage two, so nothing unusual here. So like on average, like the other affected industries, we also performed and are regularly repeating it a stress test on our retail commercial real estate portfolio with very good outcomes. We have very, very strong NTVs. One quarter effect, of course, due to the lockdown was a topic.
But as I said, food traffic is back. So we are, for the time being, very, very confident and very satisfied with our portfolio on commercial real estate retail. Maybe one look I think you also asked on where the principles are approaching. So we had three major aspects. So we took clients within those highly affected industries.
Then we, of course, had a closer look at the clients who actively asked for COVID related support, which is obvious, and clients also above certain PD thresholds. So those are the three groups that are currently reviewed and are the basis for our Stage two transfers. And as I said, all the details you will have in the disclosure.
Thank you. Thank you.
Thank you. Our next question now comes from Mait Nimis from UBS.
Yes, good morning and thank you for the presentation. I have three questions, please. Firstly, on moratoria in the region. Given some countries will end the moratoria, but that will assume and then some countries have it running until the end of the year, I'm just wondering where you see higher probability that some of these payment deferral schemes from moratoria will be extended. And also, if you could talk a little bit about how would that change your provisioning approach and perhaps the inputs for provisioning?
Secondly, I had a question on 2021 cost of risk outlook. I understand that visibility is still very low, but just taken what you mentioned that now general provisions
updated macro outlook and you're actively looking at stage migration and sector based layovers as well as individual
general defaults sort of low level. Can you state can you confirm whether you would expect a lower cost of footprint in 2021 versus this year? And the third question is on fee income. It seems like the largest decline happened in fees related to the securities business and insurance asset management product. Are these coming back?
What is your expectation for the second half of the year? Is the guidance on fee income assuming perhaps some deterioration in the lending business? If you could help me understand a little bit the moving parts here. Thank you.
On the moratoria in our regions, so let me give you three examples. In the first country where the moratoria ended, the three month moratoria was Serbia. And for almost four weeks, there was no indication that the moratoria would be prolonged. And let me also comment a little bit on this. In this month interim period, we also had contact, I think, really with all our clients in Serbia.
And the feedback was extremely positive. There's only a really super small portion of the clients would have asked for individual moratoria from the bank. However, as you may have read, Serbian government and quite surprisingly announced to extend the moratorium until September. In Austria, also the first moratorium has ended. And also there, there will be an extension.
And what we see also very positive news is that only half of the clients that have asked for the first moratorium, it's an opt in in Austria, in most of our countries, only half of them ask again. So of this is a very positive trend. And the recent news has been from Hungary. And Hungary, you know, there is the most extensive moratorium not only covering private households but also corporate clients. And it has right from the beginning, it was the longest until year end.
Yesterday, it has been published, and you could read it in the papers that negotiations. Let's just also, the banking association has started for an extension, but not this full blanket moratorium as it is in place now, but maybe more targeted and more focused. So will do we expect that governments are ready to extend moratoriums? Yes, we do, and we also see it. Does this change our approach in provisioning?
No, it does not. It is something which is not surprising. And as I said, I mean, a moratorium is a help for the clients, and it can and it plays a very important role to bridge people back to employment. And it's yes. How long it will take, we will all see, but this will not impact our methodology.
For 2021, you are right, it is, and I can only repeat it, it is too early to comment on 2021. But what I can again confirm is that we are front loading as much as is meaningfully and justifiably possible in 2020.
Okay. Thank you. Then on fee income, right, I would structure my answer, if you allow, qualitatively, and I think it's going to describe also the reflection of the volatile markets when it comes to income from Asset Management and Securities. We had a drop on the asset management side simply due to the depressed levels on the markets. This was of course a negative on the custody side and so on and so forth.
On the other hand, and this answers also your question or at least I answer your question with regard to what will recover on that. We were pretty positive as a price with regards to new business since a lot of the inflow is a constant inflow these kind of savings programs into our funds. That's why the securities business as such also on the issuing side by the way, and on the transfer orders was really positive. And here, my clear answer is that we over the year expect a reasonable good recovery. On the lending business, I personally think that the Q2 was the low, simple for the fact that there was a significantly depressed new production of ordinary business and that is in particular in April and May was let me use this radical word here, hammering down our fee income on that side.
We see already that in June and in July, this has been picking up. We will closely monitor and update you next time on this. And last but not least, also with regards to the significance in the overall fee income payments have been suffering in the second quarter. And that also was based on relatively bad result on credit card side for the simple reason that there was less business going on during the lockdown. Here, we see a good recovery, not to previous levels yet, but I hope that the Q3 year on year comparison will already look much, much better than the Q2 did.
That requires us for sure ongoing monitoring and we will update you as good as we can. Thank you.
Thank you very much.
Thank you. We'll go to our next question now from Ricardo Rovier from Mediobanca.
Morning to everybody. Couple of two, three questions, if I may. The first one to get back one second on asset quality and risk cost. With regard to the NPL coverage ratio, which has gone to 91%, which is a very high number, which basically means that you expect it to recover basically nothing when you work out the the various positions. Do you really expect the collateral when you ask back money to be really worth nothing, basically, over the course of the rest of 02/2020, maybe '21?
Second question I have is on, sorry, risk of 02/2021. You clearly say that you are doing as much as you can to up front load most of risk cost in 02/2020. Is from that statement, is it fair to assume that the situation as it is today and assuming it does not deteriorate further, we should expect in 2021 risk cost lower than in 02/2020. That that is a reasonable, let's say, understanding of your statement. The other question I have is on on Czech Republic.
There has been clearly a a drop, almost a collapse in NII in this quarter. What we have seen in Q2, can we consider that as a base, meaning that the effect on rate cuts should now be fully visible or you expect something more? And then lastly, on on assets under management, if you can provide us the number of assets under management for 2019 and first half two thousand and twenty. And lastly, maybe very, very last, with regards to cost, what has been happening during the lockdown when people were blocked at home? Have you learned anything, something about possibly changing the way you're distributing your your product.
So less physical branches and maybe more let's say use of charge because we have seen banks, especially in
the Nordic
regions, relying much more on digital channels to suffer not as much as you have done in in this quarter when people when people are blocked at home. Just just to, you know, to know your thoughts surrounding more than 2,000 branches in the group.
Ricardo, this is Bernd speaking. I will take your last question first on sort of distribution of retail products in the time of corona and what have we what did we learn. I think and I tried to indicate that in my presentation, the first observation which we had was a, how shall I say, even a digital one that everybody moved to digital channels and transactions and nobody, of course, in the absence of any physical movement went to the branch. So we very quickly jumped to conclusions, maybe too early, that there would be a massive sustainable turn of customer behavior because of this experience. Now a little bit further down the road, now we're five months into this crisis, and we see as soon as the economy in the world has opened up again, customers are showing some gravity towards their former behavior as well.
So yes, they wander back into branches. Our branch traffic is almost where it was before crisis. So we continue generally our branch mix strategy and implementation of a more digital versus physical. But still, we see that there is a significant demand, and we think that this demand will be here post corona as well for physical experience for person to person contact, and this will not go away. So yes, digital activity has moved up somewhat.
It will move up still. Contactless payments have been becoming very dominant when you look at card payments, but the branches themselves have not lost their justification. So I think that's very fair to say. And I think it takes more than a snapshot of an observation. It's more about an observation of behavioral patterns over time, which then lead you to drawing conclusions which are more sustainable.
And maybe even though it's not my home turf, let me allow me to make one statement on your first question before I hand over to Alexandra because the personal desire to address that. The coverage ratio of 91% is a reflection of a debate where European banks have been significantly criticized for not taking credit risk upfront, but rather pushing the can down the road and not anticipating what is here to come. What we are doing here is that we're building up provisions both on the forward looking indicators as well as when it comes to the significantly increased credit risk being a reflection of what is going to happen. So this coverage ratio reflects a situation where we anticipate that by the end of the year and throughout next year, we will see higher NPLs. The stock of provisions, which we have paid now will be significant and will be enough to cover that.
And then you will see a bit of a normalization of the coverage ratio, which in turn will show our expectation of what at the end of the day, we want to recover, and we think we can recover so much from my early days as a risk manager.
So let me add on this. Your question was if we would assume not to recover anything from our NPL stock, given NPL coverage of 91, this is not a correct assumption. Yes, we still expect to get recoveries from our NPL stock. And we also also, there are some collection restrictions leaking out during the moratoria, which is clear. We are seeing recoveries in our written off stock.
Those recoveries went down in Q2 compared to Q1. But still so for the first half year, we stand at above 7%, recovers in our written off stock. And for the full year, we would expect overall 10%, taking into account that there are some collection restrictions. Another maybe more technical comment also on the 91 coverage. When you look at and you have it on Slide 11, the distribution between the stages, Stage three, so the NPL stock, the coverage is 58%.
And maybe one short comment on 2021. I will only repeat, it is too early. And let me give you a general comment. Why do you front of course, loading is aimed at putting a relief on future times. But this is all the aim at front load as much as it's meaningfully and reasonably possible.
And yes, this is what you also see in the Q2 risk cost bookings.
So just to get back
one second sorry, if I may just get back one second on the coverage ratio and comment Alexander just given in thousand twenty one. So the overall idea is that, hopefully hopefully, you will charge as much as you can to free up 02/2021, if I understand correctly, if everything goes according to plan, let's say. And on the coverage ratio, to get back one second on that, if I understand it correctly, you expect these to normalize at some point to a lower level than 91. Did I get it right? Over time, not this year maybe, but over the next two, three years.
Yes. So 91% would not be a desirable level as you rightly say, we are getting recoveries on NPL stock.
So Ricardo, yes and yes. Yes.
Yes and yes. Okay. Perfect.
So, what was good for me, was the longer discussion First, I always learn additional elements when I listen to two extremely experienced risk measures answering questions that I also sometimes get done in the Investors course. Number one, it gave me time to look up in a little bit more detail answers for the questions regarding assets under management. I'll start with this one. We had assets under management slightly north of €64,000,000,000 by the year end 2019.
For obvious reasons, this number has been dropping quite significantly by nearly €4,000,000,000 below 60,000,000,000 in Q1. And in the meanwhile and unfortunately, I cannot give you the precise number and Thomas will distribute the final number of half year later on to all of you. But what I know, ejected with Ingo Playa, we will be north of 60%, again, half year simply for the reasons that distribution was okay and markets have been recovering. So that's where we stand and the precise figure will be distributed to you by our IR colleagues. Check NII, of course, a very, very important item and the clear negative as I mentioned already in my presentation.
We believe that the only good news and the bad news that we have been bottoming there. On volume side, we are on a good track. We think that production in Czech Republic, as has been mentioned throughout the call already, has been holding up extremely well, especially on mortgage side. However, the harsh drop in interest rates is a big burden. And honestly speaking, we do not expect on a pure interest rate level side this to recover.
So if you look at the Q2 compared to Q1 twenty twenty, we do not expect that to recover shortly. It hopefully will recover over time through production and new volumes. But I think it's a fair assumption to say that the Q2 is rather than new normal there than recovering back to something like Q1. One element I always have to stress when it comes to non euro denominated loan books inside the group take care also of the FX move. So that can change a little bit my statement when it comes to the euro result with regards to the local result in local currency, I'm pretty firm on that.
Maybe let me highlight one point that is super important in that respect for the bank, and we've been discussing that internally. We have the strong belief and this is in line with all public statement that Czech National Bank has ever made that they will not enter negative territories with the key rate. At the moment, they are, as you know, at 25 basis points. And we have always been indicating that a further cut to technical zero is possible. So this is something which would not change too much of all of our assumptions.
Should they? Yeah, should they? We don't expect that and we also don't think so. But it's important to highlight, should they change this view and at whatever point in time enter similar territories like the ECB or the like, this is of course a significant change. Again, we don't think so, we don't plan so, and in that sense, the current environment is pretty much what we count for what we expect for the time being in the next quarters.
Right. Thank you. Thank you very much.
Thank you. We'll go to our next question now from Alan Webbern from Societe Generale.
Hi. Thanks for your time this morning. Just sort of following on the net interest margin development. When do you think that you will see a trough? Presumably, what you're not saying is the NIM is troughing in Q2.
Is it more likely in Q3? Could you give us an idea of when you think that will happen at group level? Outside of the Czech Republic, which other countries do you think most exposed? And I think particularly with respect to Austria, I mean, certainly the sort of the NII line in Austria was pretty good in the second quarter, all things considered? And are you expecting a step down there as we go through the rest of the year?
So that some more granularity in your thoughts about the net interest margin going forward would be interesting. And perhaps also, what is the impact of sort of guarantees and moratoria on that number at the moment? So that was a question on margins. And then could you possibly put a little bit more granularity on the provisioning done in 2Q, both in Hungary and in Romania? Thank you.
Yes. Let me take the question on NII and NIM right away, Alan. It's absolutely correct observation. And I draw your attention and probably we have anyway been flipping through already to page 31 to get more detail on that, that we have been holding very well Austrian hemisphere in the second quarter or actually the whole first half year. And that's also pretty much true for Slovakia.
That indicates a little bit let me put it that way, that in the Eurozone, the whole damage of rate cuts and rate cuts and rate cuts has been done already before whole COVID has been hitting and the other countries, in particular, of course, Czech Republic, but also in partially in Romania, where we could make up for the drops in rates by volumes. This has only been coming later. You remember that we have always been using this term NII beats NIM, which is, of course, as such not precisely correct, but we've always wanted to express that we were outgrowing the drop in NIM. This of course does not hold true in this current environment and the NIM drops or reductions are playing into the pin. I know from my business colleagues that in the very first phase, the first I would call it one to two months, we saw a significant reflection of the extended spreads in capital markets, also in the loan pricing.
Unfortunately, that time there was hardly any production, so it was more a theoretical point. And in the meanwhile, due to the liquidity situation all across the markets, there is a significant competition still and again going on. And honestly speaking, I do not short term see any reversal, let's be very open and honest on that, on the NIM pressure due to interest rate combined with the liquidity environment. However, and that's also important to be said, all that in all the details will also depend not only on the macro and overall economic situation, but also on the further development as has been discussed already on moratoria, because moratoria themselves guarantee schemes are definitely a negative on the NIM side since most of them are related to strict cap rules or whatsoever and all of them are pretty much prohibiting any really increase in capital markets, I should say, appropriate levels. That's what I would comment on as of now.
So honestly speaking, no short term relief on the NIM pressure for now. Thank you.
So on Romania and on Hungary. Hungary, as already mentioned before, is different than the other countries as it has the most really, by far, most extensive moratorium, the longest and also covering the largest group of clients. So to put it very bluntly, we will not more much more in Q3. That's why the front loading effect is highest in Hungary. And with the bookings of €54,000,000 in Q2, we expect that the biggest part of risk costs for the next eight months should be reflected.
Romania. In Romania, we booked €78,000,000 thereof the part for FLI was not so big as in Romania. Some of you remember, we already had a very strong impact on macro already in Q4 twenty nineteen. And Romania, the big difference in Q2 to Q1 is due that we had one very large positive recovery. So a very old nonperforming loan has been solved in Q1, which was a big driver for the very low risk costs in Romania in the first quarter.
And in second quarter, yes, this effect did not happen. Yes, that's it.
Lovely. Thanks very much.
Thank you. Our next question now comes from Olga Vasilova from Bank of America.
Good morning. I have well, first of all, thank you so much for your detailed answers. I have two remaining questions. One of them is about sensitivity. Please remind us your sensitivity to the ECB policy rate.
But also, could you help us to understand if in any of your countries or regions, your sensitivity has changed to what you have been guiding before in this new low interest rate environment. So this is my first question. My second question is about your provision coverage. Let me come back to this material increase in this share of Stage two loans. The share almost doubled year to date.
How comfortable are you with your coverage there? Do you have any targets in mind? The reason I ask is because the coverage looks relatively low to me versus EMEA average, but I appreciate if we shouldn't compare this to EMEA, should compare to your European peers. Thank you so much.
I can be very short order on the sensitivities. We do not have and we do not give an indication on euro rate sensitivity. This is simply and I think it's fair to say that simply too complex in the overall balance sheet and the impact and all the measures around the respective key rate, there is no direct relation seriously to be calculated. Check rate, we always said, and there is no change to that, 25 basis points give or take translates into 20,000,000, and that holds true still. Obviously, there is not too much room anymore from where we are at the moment, subject to what I discussed before about the Czech National Bank.
So that's pretty much it and nothing more to add seriously, to be honest. Alexandra?
I can also be very brief. The doubling of Stage two
I'm sorry, can we also discuss Hungary?
In what interest? Interest to Bupak? Rate sensitivity? Was dramatically lower. So materiality on the group right side in direct translation relatively low.
Let me point out that the most successful product in Hungary, so called baby loan has in a fair value. So what is there significantly by the way, we are extremely successful there in production, clear number two behind the market leader. And this is also holding up the operating results there well, but it is valued at fair value. And therefore, this alone combined with the portfolio there is making it impossible to rate the direct number that is relevant on group side. So clearly, way, way, way, way below any numbers that you know from Czech Republic.
So honestly speaking, I wouldn't anchor any number that on group side is of dramatic relevance.
So very brief on your question on risk. So as we aim front loading, as you know, and we don't see the Stage three movements so far, I feel comfortable with the strong increase in Stage two because this is the result of the front loading. And I feel equally comfortable with the 3.8% coverage also in comparison what we can compare to peers and benchmarks. And if we keep it at that level, I still feel comfortable.
Thank you.
Thank you. We'll go to our next question now from Hugo Cruz from KBW.
Hi. Thank you for taking the time. Some questions on capital. So on the dividend, do you think, you know, from your discussions with the regulators that you'll ever be allowed to pay dividend in excess of your reported net income in that year? And would you consider doing an interim in early two thousand twenty one to pay some of the dividend accrued from 2020 and 02/2019?
And then finally, when you're comfortable that you have excess capital above your 13 and a half percent target, would you consider M and A to use some of that excess capital? That's it. Thank you.
Everything that I say now is, of course, subject to final discussion with the regulator. And you know how strict the GSE can be when it comes to really details of capital distribution and so on. So please let me say that before I give you my personal view on it. I think you're spot on. It's true that there is a scenario possible if the ECB ban or ECB recommendation, sorry, correct myself, if the kind ECB recommendation is extended even further that there might be a situation where depending on a very, very good and sound capital position and a reasonable business and market outlook that we would have an accumulated situation where there is an accumulation of a twenty nineteen-twenty twenty dividend.
That could also end up in a level that in terms of percentage to the actual previous year could be significantly higher than normal. But of course, this would have to be seen in the context of actually relating to two years. That's my interpretation. So I hope you understand what I mean, I'm sure you do. So technically, I think that's possible.
That's always important that we discussed it and pre discussed it properly. But my understanding of all of what we hear from our regulators that the content counts there and the capital preservation is relevant for them, and it's not so much formalities around that. That's my interpretation of what I read in here.
Picking up on the second question on M and A in the context of excess capital or of sufficient capital, we stick to what we have said last time. We do believe that this situation will offer consolidation opportunities. We monitor the market, and we will take opportunities as they come as long as they fit to our strategy and are reasonably cheap.
Okay. Thank you.
Thank you. We'll go to our next question now from Andre Vercellone from Exane.
Good morning. I've got four questions. The first one is on your outlook for lending growth. You say for 2020, underlying lending growth flattish versus last year. It was already up 1.2% year to date excluding the Moratoria impact and the government guaranteed loans impact.
You commented just now that production in Czech Republic is doing well. You made comments before that corporate demand was healthy. So I struggle a little bit to reconcile why would the underlying element end up at flattish. Second question is on the government guaranteed loans. So you have given us some numbers, and it seems your clients are not really taking them up.
Because even in Austria, relative to the size of the bank, it's quite low, the amount of government guaranteed loans you have done. Qualitatively, can you just comment a little bit as to why this is happening? My understanding is these loans are quite cheap, so I find it a little bit bizarre that the clients are not taking them. The third question is on dividends, but it's more procedural question rather than a numbers questions. So let's assume for the sake of discussion that the dividend ban is lifted at some point next year.
However, your AGM
has to be
called this year to approve the twenty nineteen accounts. My understanding is it cannot approve a dividend because it's banned, so you cannot precommit. The so what happens? How will you be able if you want to to distribute some of it? Will you have to call another AGM at some point in the future?
And if you're not able to commit to it by year end, does this amount stay in the core tier one capital, or you have to reverse it and then potentially pay it out at some other point. So I just don't understand, what are the steps, to eventually pay some or all of it out if you so wish and if the ban is lifted next year. And the fourth question, it's a very small one. Can you discuss a little bit, the net interest income in Hungary in the quarter? I was a bit surprised that it went down, to be honest, given that long term rates are flat and short term rates are up a lot in the quarter.
So a bit of an explanation as to what happened there. Thank you.
Okay. Andrea, let me start what Marc so to say. The in Hungary, NII, Q2, the shift and if you remember, we mentioned it in Q1. We were, at the very first point, we were allocating, the the the impact of the moratoria in Hungary to other operating results, if I'm not mistaken, right? Correct.
Yes. And this is now the re the the the adjustment of the NII because we were allocating it to NII and, and very, very, very little of it to risk provisions. Okay? Number one.
Number two So so there's
a so there's a negative one You have
reversed a negative negative one in in in this line, but not in total.
Yeah. Yeah.
But in this line
so this line is not the base for the future because you have reversed the negative index. Correct? Not the run rate. Okay.
NII, we are okay. We are doing good things.
Okay. Don't need to explain further. It's clear.
I very much hope so. Okay. Next thing, you are absolutely right with regards to your dividend question that this is very much a technicality. I think the one part as Dan Spike and myself like to explain is our clear economic intention and what we have been very, I would say, professional and very good discussions with the regulator. This is our willingness, our ability and so on to distribute.
Yes, there are questions around what do you need to put to a AGM decision at what point in time. I think if you read thoroughly the ECB letter, this has been going out to the bank, it was not specified there. And we have been talking to a lot of people around that and those internally with everyone. I think there is still some question marks behind what should be decided when, because what is a real final commitment legally and so on and so forth. This is all important, but this is all technicalities.
What is clear for us with the year end 2020, so that means with January 2021, we have to make a decision with regards to our allocation, not only to the regulatory capital, but also to the to the accounting capital, where do we want to build which reserves. So that's definitely a point in time, where someone will draw conclusions on what we have been allocating where, and do we have the respective predistributable reserves available for the dividend distribution. So I think it's very, very important to discuss all these technicalities. On the other hand, what I think is more important is what is the situation with our ability in terms of regulatory environment to pay out, and then of course, the absolute level and be sure we will find a good solution together with the regulators once the recommendation is been figured out. I think that was this one.
And then we had outlook on lending growth. Take both the outlook on lending growth as well
as on your question on the government guaranteed loans, both sit somewhat together. On the government guaranteed loans, what you can expect, there's a lot of loans still being processed in the pipeline. So what you see as hardcore figures here is what is booked, not what is yet being applied for. So there will be some more inflow. So we expect a doubling of the government guaranteed loans from here, if you look at the Austrian side.
So yes, there is still demand for that. Secondly, if we look into a flattish outlook for the loan growth this year, this does reflect and maybe it's a little cautious, but still, it does reflect an anticipation that confidence into longer term investments will go back and reluctance of specifically corporate customers, but also retail customers in taking longer term positions until the crisis is not over will dominate the scene. Maybe this is a little cautious, but this is what is the backbone of our anticipation. It's not qualified by any kind of academic research. It's an anticipation of customer behavior as much as we see it.
Okay. Thank you.
Thank you. Our final question comes from Riccardo Rovere from Mediobanca.
Actually, thanks. But actually, my questions have just been asked by Andrea. I was meant to ask if that's the same thing. Okay.
Then thank you very much. Thanks a lot for taking the time to listen in and participating into a very active debate around our results. I wish you all a very relaxing summer, hopefully, and we reconvene at our Q3 results announcement on 11/02/2020. Thank you very much, ladies and gentlemen.
Thank you. This will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.